This is an entirely free service. No payments are to be made. Also send me The Ultimate Guide to Profiting From Derivatives and sign me up for Profit Hunter,a free newsletter that focuses on identifying short term money making opportunities.Download NowSubscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.

Dr Reddy's: India disappoints

Nov 10, 2011

Dr Reddy's has announced its second quarter results for 2012 (2QFY12). The company has reported 21.2% YoY and 7.3% YoY growth in sales and profit after tax respectively. Here is our analysis of the results.

Performance summary

Sales grow by 21.2% YoY led by strong growth from North America (NA), Russia & CIS (RCIS) and bulk drugs (PSAI) division. However, there is a slowdown seen in the domestic sales growth.

What has driven performance in 2QFY12?

Dr Reddy's sales for the quarter grew by a robust 21.2% YoY led by strong performance from Global generics and PSAI division. Global generics, the largest revenue contributor, grew by 18.1% YoY led by robust growth of 42% in North America. The PSAI (bulk drugs) division surprised positively by clocking a growth of 34.4% where growth was driven across geographies. Though the global generics performed well, the domestic formulations saw a growth of around 9.5%, much lower than the industry growth of 13%-14%. A point to note is that it is the fourth consecutive month of muted growth.

Revenue break-up

(Rs m)

2QFY11

2QFY12

Change

6mFY11

6mFY12

Change

PSAI

5,338

7,177

34.4%

10,614

12,938

21.9%

Global Generics

13,667

16,136

18.1%

25,584

30,560

19.4%

Proprietary Products

131

264

101.7%

254

461

81.7%

Others

289

346

19.7%

581

677

16.5%

Total Sales

19,425

23,922

23.2%

37,033

44,635

20.5%

Less: Inter-segmental

721

1,244

72.5%

1,498

2,173

45.1%

Net revenues

18,704

22,678

21.2%

35,535

42,461

19.5%

Operating margins (EBITDA) decreased by 50 bps (0.5%) due increase in raw material costs. The huge increase in the SG&A expenses was offset by savings from other expenditure and R&D expenses. The increase in SG&A expenses was partly led by the costs related to the Bristol facility, OTC expenses in Russia and higher staff costs.

Dr Reddy's profit after tax increased merely by 7.3% YoY led by higher taxes. From a tax incidence of around 10% in the same quarter previous year, it rose up to 17%.

Dr Reddy's introduced 5 new products in the US market, including 2 limited competition products. Fondaparinux, the generic version of Arixtra, currently has a market share of 10% in the US and the company expects it to increase after increasing the production. During the quarter 4 new ANDAs were filed. A total of 76 products (40 para IV and 11 First to File) are pending approval Revenue from the Bristol penicillin facility should ramp up from 3QFY12 and is expected to be around US$ 60 m on an annual basis.

What to expect?

At the current price of Rs 1,617, the stock is trading at a price to earnings multiple of 17 times our estimated FY14 earnings. The management expects the growth to be driven from the North American market. This will be triggered by increasing market share of products like Fondaparinux, Olanzapine and Fexofenadine OTC. The new penicillin facility acquired from GSK will further help. The outlook for the US generics remains buoyant with a strong Para IV pipeline.

In order to capitalize on the blockbuster drugs going off patent over the next few years, the company is focusing on building a strong pipeline in the US. Apart from that the custom manufacturing business and other core businesses will also help on a long-term basis. Having said this, in the medium term, the domestic formulations business is not expected to do well due to factors like high attrition at around 25% and intense pricing pressure from MNCs and local players. Considering all these factors, current valuations do not leave much on the table for investors.

OTHER USEFUL LINKS

MARKET STATS

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.